Going concern guidance for pension scheme accounts

The Pensions Research Accountancy Group (PRAG) has published guidance to assist Trustees and auditors to deal with the raised profile of the concept of going concern, when they are preparing and auditing pension scheme accounts. The guidance aims to develop a practical and proportionate response. Both Trustees and auditors are now required to make additional disclosures in the annual report on going concern.

For the majority of pension schemes the going concern assessment will be straightforward and the additional disclosure in the scheme audit report will be uncontroversial. However, there will inevitably be a small number of instances where the going concern assessment will be more challenging and disclosures will be more sensitive.

Guidance

The revised International Standards of Auditing in the UK, require auditors to include an explicit reference to the use of the going concern basis of accounting in their Audit Reports. This is also covered in auditing Practices Note 15 for pension schemes. The accounting standard FRS 102 and the pensions SORP, also include reference to the Trustee’s responsibilities for assessing going concern.

PRAG guidance ‘Pension Scheme Accounts and Going Concern’ aims to assist Trustees and auditors in developing their approach to going concern assessment in a practical and proportionate way. For most schemes it is anticipated that the assessment will be straight forward. The PRAG guidance is available to members via the PRAG website. The requirement applies to defined benefit, defined contribution and hybrid pension scheme accounts.

New disclosures

A statement about going concern is now required to be included in both the Audit Report and, the Statement of Trustees’ Responsibilities.

There are is also an additional representation on going concern made to the auditors in the management representation letter. For most schemes these new disclosures will be straight forward. There will however be cases where the accounts are prepared on a cessation basis or, there is a material uncertainty as to whether a pension scheme is a going concern. In these cases the Audit Report will draw attention to these facts and any disclosures made in the report and accounts on these matters. These situations will need to be dealt with based on their particular circumstances. Key to this will be early discussion of any such issues.

Where accounts are prepared on a cessation basis, in most cases this will not have an impact on the values in the accounts, where they are already valued at fair value. In most cases the key consideration will be around disclosure.

Trustee assessment of going concern

Although there has been no change to Trustees’ responsibilities in relation to going concern, the additional disclosure requirement highlights the Trustee reporting responsibilities and, raises the profile of the concept of going concern. Trustees should therefore consider how they will formally document their assessment on going concern and material uncertainties in relation to going concern.

In assessing whether the going concern assumption is appropriate, Trustees should assess a period of at least 12 months from the date of approval of the accounts, based on information available at the time of approval of the accounts. Trustees are not expected to ‘crystal ball gaze’ into possible scenarios in the future.

In making their assessment, Trustees should consider information available to them in the ordinary course of running the scheme. Possible considerations for Trustees could include the following:

 

1. Has a decision has been made to wind up the scheme (by employer or Trustee)?
2. Has a formal decision been made to buy out a scheme’s liabilities?
3. Have any trigger events occurred that cause a wind up under the trust deed and rules?
4. Are there concerns over the employer covenant?
   • Are the results of an employer covenant review poor?
   • Is the employer is experiencing financial difficulties which is giving concerns about its ability to pay future contributions. Financial difficulties could be indicated by where banking facilities are being renegotiated, there are profitability issues, loss of key customers and/or cash flow issues. For listed companies there may be profit warnings. There also may be disclosures around going concern issues in the employer accounts.
   • Are there any notifiable events to the Pensions Regulator?
   • Has the employer has experience an insolvency event?
5. Scheme funding
   • For defined benefit schemes, is the actuarial valuation complete and a recovery plan is in place?
   • Are contributions payments are up to date or are there are any significant late contributions or a history of significant late contributions?
6. Are there contingent assets in place?
7. Does another group company provide financial support?
8. Is the scheme in the PPF assessment period?
9. Has the Pensions Regulator issued a freezing order?
10. Has the Pensions Regulator ordered the scheme to be wound up?

This is not an exhaustive list and there may be others specific to the scheme circumstances. In addition some of these considerations may not be relevant to all schemes. If any of the above situations apply, this may not mean the accounts cannot be prepared on a going concern basis. It is for the Trustees to assess what the impact is on going concern. Suggested good practice is for Trustees to document their assessment as a short paper and/or formally minuted.

What you need to do

Trustees need to make an assessment of going concern as part of the accounts preparation process assessment; this will form the basis of the auditor’s considerations of this area. Additional disclosure needs to be included in the Statement of Trustee Responsibilities and in the Audit Report. Trustees will also need to make an additional representation in this area in the letter of representation.

How we can help

At Crowe, we are able to draw on our in-depth knowledge of standards of practice to support Trustees through the new disclosure requirements regarding going concern. If you would like to discuss this further please contact your usual Crowe contact or Shona Harvie.